Exploring FASB’s ASU 2023-05
The Financial Accounting Standards Board (FASB) has recently issued Accounting Standards Update (ASU) No. 2023-05, Business Combinations — Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. Before the issuance of ASU 2023-05, there was no authoritative guidance on the accounting for the initial measurement of assets and liabilities contributed to a joint venture at the time of formation. As a result, some joint ventures measured such contributions by using the venturers’ respective carrying amounts while others recognized the contributions at fair value. The new guidance addresses this diversity in practice by establishing requirements for the recognition and initial measurement of a joint venture’s net assets and liabilities on the formation date.
The amendments in ASU 2023-05 require that a joint venture apply the following key adaptations upon formation:
- The formation of a joint venture is the creation of a new reporting entity, and none of the assets and/or businesses contributed to the joint venture are viewed as having survived the combination as an independent entity. Accordingly, unlike in a business combination, the formation of a JV does not result in the identification of an accounting acquirer or a determination that one party gained control over another party.
- A joint venture measures the net assets and goodwill, if any, at the formation date, the date on which an entity initially meets the definition of a joint venture. The formation date is not necessarily the date on which the legal entity was formed – the assets of the joint venture may be contributed by one or both of the parties to the joint venture at a later point in time as there is no further guidance about this determination, it could require significant judgment.
- Initial measurement of a joint venture’s total net assets is equal to the fair value of 100 percent of the joint venture’s equity. The amendments require that a joint venture measure its total net assets upon formation as the fair value of the joint venture as a whole. The fair value of the joint venture as a whole equals the fair value of 100 percent of a joint venture’s equity immediately following formation (including any noncontrolling interest in the net assets recognized by the joint venture).
- A joint venture is required to provide specific disclosures aimed at giving financial statement users a better understanding of the nature and financial effect of the joint venture’s formation. Those disclosures include the formation date, a description of the joint venture’s purpose and why it was formed, the fair value of the joint venture on the formation date, the amounts recognized by the joint venture for each major class of assets and liabilities, qualitative description of the factors that make up any goodwill recognized, and the affected amounts if the valuation of any of the amounts recognized are incomplete or any measurement period adjustments are recognized.
The amendments are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Additionally, a joint venture that was formed before January 1, 2025, may elect to apply the amendments retrospectively if it has sufficient information. Early adoption is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance), either prospectively or retrospectively. Companies should strategically plan to adapt to these changes effectively. This includes revisiting joint venture strategies, aligning them with the new standards, and considering the long-term financial implications of ASU 2023-05.
For questions on how to implement this new accounting standard, please contact your Dannible & McKee professional advisor.
Contributing author: Kaitlyn H. Axenfeld, CPA/CFF, CFE, has extensive experience providing audit, review, compilation and advisory services to a wide variety of clients with a focus on the construction, architecture/engineering and manufacturing industries. Kaitlyn specializes in forensic accounting and consulting services, including litigation support to law firms and privately held companies in fraud detection, damage calculations and prevention matters. If you have any questions or need any assistance, please contact Kaitlyn at firstname.lastname@example.org.